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2011-32841

  • Federal Register, Volume 76 Issue 247 (Friday, December 23, 2011)[Federal Register Volume 76, Number 247 (Friday, December 23, 2011)]

    [Rules and Regulations]

    [Pages 80233-80241]

    From the Federal Register Online via the Government Printing Office [www.gpo.gov]

    [FR Doc No: 2011-32841]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Chapter 1

    Amendment to July 14, 2011 Order for Swap Regulation

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final order.

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    SUMMARY: On October 25, 2011, the Commodity Futures Trading Commission

    (``CFTC'' or the ``Commission'') published in the Federal Register a

    Notice of Proposed Amendment (``Notice'') to extend the temporary

    exemptive relief the Commission granted on July 14, 2011 (``July 14

    Order'') from certain provisions of the Commodity Exchange Act

    (``CEA'') that otherwise would have taken effect on the general

    effective date of title VII of the Dodd-Frank Wall Street Reform and

    Consumer Protection Act (``the Dodd-Frank Act'')--July 16, 2011. This

    final order extends the July 14 Order with certain modifications.

    Specifically, it extends the potential latest expiration date of the

    July 14 Order from December 31, 2011 to July 16, 2012; and adds

    provisions to account for the repeal and replacement (as of December

    31, 2011) of part 35 of the Commission's regulations.

    DATES: This final order will be effective on December 23, 2011.

    FOR FURTHER INFORMATION CONTACT: Mark D. Higgins, Counsel, (202) 418-

    5864, mhiggins@cftc.gov, Office of the General Counsel; Jocelyn

    Partridge, Special Counsel, (202) 418-5926, jpartridge@cftc.gov,

    Division of Clearing and Risk; Ryne Miller, Attorney Advisor, (202)

    418-5921, rmiller@cftc.gov, Division of Market Oversight; Commodity

    Futures Trading Commission, Three Lafayette Centre, 1155 21st Street

    NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Act into

    law.\1\ Title VII of the Dodd-Frank Act amends the CEA \2\ to establish

    a comprehensive new regulatory framework for swaps. The legislation was

    enacted to reduce risk, increase transparency, and promote market

    integrity within the financial system by, among other things: (1)

    Providing for the registration and comprehensive regulation of swap

    dealers and major swap participants; (2) imposing clearing and trade

    execution requirements on standardized derivative products; (3)

    creating robust recordkeeping and real-time reporting regimes; and (4)

    enhancing the rulemaking and enforcement authorities of the Commission

    with respect to, among others, all registered entities and

    intermediaries subject to the Commission's oversight.\3\

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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Public Law 111-203, 124 Stat. 1376 (2010).

    \2\ 7 U.S.C. 1 et seq.

    \3\ Title VII also includes amendments to the federal securities

    laws to establish a similar regulatory framework for security-based

    swaps under the authority of the Securities and Exchange Commission

    (``SEC'').

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    Section 754 of the Dodd-Frank Act states that, unless otherwise

    provided, the provisions of subtitle A of title VII of the Dodd-Frank

    Act \4\ ``shall take effect on the later of 360 days after the date of

    the enactment of this subtitle or, to the extent a provision of this

    subtitle requires a rulemaking, not less than 60 days after publication

    of the final rule or regulation implementing such provision of this

    subtitle.'' Thus, the general effective date for provisions of title

    VII that do not require a rulemaking was July 16, 2011. This includes

    the provisions that repealed several provisions of the CEA as in effect

    prior to the Dodd-Frank Act that excluded or exempted, in whole or in

    part, certain transactions from Commission oversight.\5\

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    \4\ All of the amendments to the CEA in title VII are contained

    in subtitle A. Accordingly, for convenience, references to ``title

    VII'' in this Notice shall refer only to subtitle A of title VII.

    \5\ These exclusions and exemptions were contained in former CEA

    sections 2(d), 2(e), 2(g), 2(h), and 5d, 7 U.S.C. 2(d), 2(e), 2(g),

    2(h), and 7a-3.

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    Section 712(d)(1) of the Dodd-Frank Act requires the Commission and

    the SEC to undertake a joint rulemaking to ``further define'' certain

    terms used in title VII, including the terms ``swap,'' ``swap dealer,''

    ``major swap participant,'' and ``eligible contract participant.'' \6\

    Section 721(c) requires

    [[Page 80234]]

    the Commission to adopt a rule to ``further define'' the terms

    ``swap,'' ``swap dealer,'' ``major swap participant,'' and ``eligible

    contract participant'' to prevent evasion of statutory and regulatory

    obligations.\7\ The Commission and the SEC have jointly issued two

    notices of proposed rulemaking that address these further

    definitions.\8\

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    \6\ Section 712(d)(1) provides: ``Notwithstanding any other

    provision of this title and subsections (b) and (c), the Commodity

    Futures Trading Commission and the Securities and Exchange

    Commission, in consultation with the Board of Governors [of the

    Federal Reserve System], shall further define the terms `swap',

    `security-based swap', `swap dealer', `security-based swap dealer',

    `major swap participant', `major security-based swap participant',

    and `security-based swap agreement' in section 1a(47)(A)(v) of the

    Commodity Exchange Act (7 U.S.C. 1a(47)(A)(v)) and section 3(a)(78)

    of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(78)).''

    \7\ Section 721(c) provides: ``To include transactions and

    entities that have been structured to evade this subtitle (or an

    amendment made by this subtitle), the Commodity Futures Trading

    Commission shall adopt a rule to further define the terms `swap',

    `swap dealer', `major swap participant', and `eligible contract

    participant'.''

    \8\ See Further Definition of ``Swap Dealer,'' ``Security-Based

    Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based

    Swap Participant'' and ``Eligible Contract Participant,'' 75 FR

    80174, Dec. 21, 2010 and Further Definition of ``Swap,'' ``Security-

    Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;

    Security-Based Swap Agreement Recordkeeping, 76 FR 29818, May 23,

    2011.

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    The Commission's final rulemakings further defining the terms in

    sections 712(d) and 721(c) were not expected to be in effect as of July

    16, 2011 (i.e., the general effective date set forth in section 754 of

    the Dodd-Frank Act). Accordingly, on July 14, 2011 the Commission

    exercised its exemptive authority under CEA section 4(c) \9\ and its

    authority under section 712(f) of the Dodd-Frank Act by issuing the

    July 14 Order.\10\ In so doing, the Commission sought to address

    concerns that had been raised about the applicability of various

    regulatory requirements to certain agreements, contracts, and

    transactions after July 16, 2011, and thereby ensure that current

    practices will not be unduly disrupted during the transition to the new

    regulatory regime.\11\

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    \9\ 7 U.S.C. 6(c).

    \10\ Effective Date for Swap Regulation, 76 FR 42508 (issued and

    made effective by the Commission on July 14, 2011; published in the

    Federal Register on July 19, 2011). Section 712(f) of the Dodd-Frank

    Act states that ``in order to prepare for the effective dates of the

    provisions of this Act,'' including the general effective date set

    forth in section 754, the Commission may ``exempt persons,

    agreements, contracts, or transactions from provisions of this Act,

    under the terms contained in this Act.'' Section 754 specifies that

    unless otherwise provided in Title VII, provisions requiring a

    rulemaking become effective ``not less than 60 days after

    publication of the final rule'' (but not before July 16, 2011).

    \11\ Concurrent with the July 14 Order, the Commission's

    Division of Clearing and Intermediary Oversight and the Division of

    Market Oversight (together ``the Divisions'') identified certain

    provisions of the Dodd-Frank Act and CEA as amended that would take

    effect on July 16, 2011, but that may not be eligible for the

    exemptive relief provided by the Commission in its July 14 Order--

    specifically, the amendments made to the CEA by Dodd-Frank Act

    sections 724(c), 725(a), and 731. On July 14, 2011, the Divisions

    issued Staff No-Action Relief addressing the application of these

    provisions after July 16, 2011. The Commission staff has informed

    the Commission that it is separately considering whether to issue a

    no-action letter in which the staff would state that it would not

    recommend that the Commission commence an enforcement action against

    markets or market participants for failure to comply with the above-

    referenced provisions over a period of time co-extensive with that

    set forth in this final order.

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    II. Description of Relief Provided in July 14 Order

    The July 14 Order groups the relevant provisions of the Dodd-Frank

    Act into four categories and provides temporary exemptive relief, set

    to expire no later than December 31, 2011, with respect to Categories 2

    and 3. A summary of the four categories of provisions follows.

    Category 1 covers statutory provisions which by their express terms

    require a rulemaking. Because, under section 754 of the Dodd-Frank Act,

    these provisions do not become effective until at least 60 days after

    the final rule is published, no exemptive relief from the general

    effective date is necessary. Category 1 provisions include, among

    others, the further definitions of terms regarding swap entities or

    instruments as required by the Dodd-Frank Act (such as the terms

    ``swap,'' ``swap dealer,'' ``major swap participant,'' or ``eligible

    contract participant''). Category 1 also includes, among others: (1)

    Registration, capital and margin requirements, and business conduct

    standards for swap dealers and major swap participants; (2) provisions

    prohibiting agricultural swaps except pursuant to CFTC rules; (3) rules

    regarding swap execution facilities; and (4) various swap data

    recordkeeping and reporting requirements. A complete list of the

    Category 1 provisions is included in the appendix to the July 14 Order.

    The first part of the relief provided for in the July 14 Order

    reaches those Dodd-Frank Act provisions (``Category 2 provisions'')

    that are self-effectuating (i.e., do not require a rulemaking) and that

    reference one or more of the terms for which the Commission and SEC are

    required to provide further definition, including ``swap,'' ``swap

    dealer,'' ``major swap participant,'' ``eligible contract

    participant,'' and ``security-based swap agreement'' (collectively, the

    ``referenced terms''). These Category 2 provisions include, for

    example, the trade execution requirement of CEA section 2(h)(8), as

    amended by Dodd-Frank Act section 723. A complete list of the Category

    2 provisions is included in the appendix to the July 14 Order. Because

    the Category 2 provisions would have taken effect on July 16, 2011

    pursuant to section 754, the Commission granted temporary relief from

    those provisions, but only to the extent that the requirements in such

    provisions specifically relate to a referenced term that is not yet

    further defined. Thus, if a Category 2 provision also applies to

    futures or options on futures, the provision took effect on July 16

    with respect to futures or options on futures. The exemption for

    Category 2 provisions expires on the earlier of: (1) The effective date

    of the applicable final rule further defining the relevant term; or (2)

    December 31, 2011.

    In part two of the July 14 Order, the Commission provides temporary

    exemptive relief from the provisions of the CEA that may apply to

    certain agreements, contracts, and transactions in exempt or excluded

    commodities (generally, financial, energy and metals commodities) as a

    result of the repeal of the CEA exemptions and exclusions in former CEA

    sections 2(d), 2(e), 2(g), 2(h), and 5d as of July 16, 2011 pursuant to

    sections 723(a)(1) and 734(a) of the Dodd-Frank Act (the ``Category 3

    provisions''). As explained in the July 14 Order, this relief is based

    on the Commission's existing ``part 35'' exemptive rules.\12\

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    \12\ 76 FR at 42514. The July 14 Order did not extend to

    agreements, contracts, or transactions that fully met the conditions

    of part 35, since in such circumstances further relief was

    unnecessary.

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    Part 35 originally was promulgated in 1993 pursuant to, among

    others, the Commission's general exemptive authority in CEA section

    4(c) and its plenary options authority under section 4c(b),\13\ and

    provides a broad-based exemption from the CEA for ``swap agreements''

    in any commodity. Specifically, part 35 exempts ``swap agreements,'' as

    defined therein, from most of the provisions of the CEA if: (1) They

    are entered into by ``eligible swap participants'' (``ESPs''); \14\ (2)

    they are not part of a fungible class of agreements standardized as to

    their material economic terms; (3) the creditworthiness of any party

    having an actual or potential obligation under the swap agreement would

    be a material

    [[Page 80235]]

    consideration in entering into or determining the terms of the swap

    agreement, including pricing, cost, or credit enhancement terms; and

    (4) they are not entered into or traded on a multilateral transaction

    execution facility.

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    \13\ 7 U.S.C. 6c(b).

    \14\ As noted in the July 14 Order, the parties covered under

    the ESP definition, while very broad, are not coextensive with those

    covered by the terms ``eligible commercial entity'' or ``eligible

    contract participant.'' Therefore, it is possible that a small

    segment of persons or entities that are currently relying on one or

    more of the CEA exclusions or exemptions cited above might not

    qualify as an ESP and consequently would not be eligible for part

    35. 76 FR at 42511, n. 40.

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    Under part two of the relief provided for in the July 14 Order, the

    Commission stated that transactions in exempt or excluded commodities

    (and persons offering, entering into, or rendering advice or rendering

    other services with respect to such transactions) are temporarily

    exempt from provisions of the CEA that may apply to such transactions

    if such transactions comply with part 35, notwithstanding that: (1) The

    transaction may be executed on a multilateral transaction execution

    facility; (2) the transaction may be cleared; (3) persons offering or

    entering into the transaction may be eligible contract participants as

    defined in the CEA (prior to the enactment of the Dodd-Frank Act); (4)

    the transaction may be part of a fungible class of agreements that are

    standardized as to their material economic terms; and/or (5) no more

    than one of the parties to the transaction is entering into the

    transaction in conjunction with its line of business, but is neither an

    eligible contract participant nor an ESP, and the transaction was not

    and is not marketed to the public.\15\

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    \15\ 76 FR at 42514. With respect to commodity options, the

    Commission clarified that options identified in the swap agreement

    definition in paragraph (b)(1)(i) of Sec. 35.1 of the Commission's

    regulations and any options captured by the concluding catch-all

    language in that paragraph, as well as any options described in

    paragraphs (b)(1)(ii) and/or (iii) of Sec. 35.1, involving excluded

    or exempt commodities are within the scope of the July 14 Order. 76

    FR at 42514-15.

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    Thus, for certain transactions, the July 14 Order provides relief

    notwithstanding that the transaction may not satisfy certain part 35

    requirements (e.g., cleared, executed on a multilateral trade execution

    facility, entered into by certain persons that are not eligible

    contract participants, etc.). The Commission stated in the July 14

    Order that this relief is limited to transactions in exempt and

    excluded commodities, and does not extend to transactions in

    agricultural commodities, because transactions in agricultural

    commodities were not covered by the applicable statutory exclusions and

    exemptions in effect prior to July 16, 2011.\16\ The exemption in part

    two of the July 14 Order expires on the earlier of: (1) The repeal,

    withdrawal or replacement of part 35; or (2) December 31, 2011.

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    \16\ The Commission also stated, though, that because part 35

    remained in effect at the time of the July 14 Order, market

    participants could continue to rely on part 35 with respect to swaps

    (other than commodity options) on enumerated agricultural

    commodities as defined in CEA section 1a(4) or Sec. 32.2 of the

    Commission's regulations, as well as swaps and commodity options on

    non-enumerated agricultural commodities, to the extent these

    transactions fully comply with part 35. Under the July 14 Order,

    market participants also may continue to rely on part 32 for options

    on enumerated agricultural commodities to the extent these

    transactions are conducted in accordance with Sec. 32.13(g) of the

    Commission's regulations. Rule 32.13(g) permits off-exchange options

    offered to producers, processors, commercial users or merchants of

    the commodity or its products or by-products that have a net worth

    of at least $10 million, provided the offeree also has a net worth

    of at least $10 million.

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    Category 4 contains those Dodd-Frank Act provisions for which the

    Commission determined not to issue relief, and which therefore went

    into effect on July 16, 2011. A complete list of the Category 4

    provisions is included in the appendix to the July 14 Order.

    The temporary exemptions issued in the July 14 Order are subject to

    several conditions. These conditions provide that the July 14 Order

    shall not: (1) Limit in any way the Commission's anti-fraud or anti-

    manipulation authority under the CEA; (2) apply to any provision of the

    Dodd-Frank Act or the CEA that became effective prior to July 16, 2011;

    (3) affect any effective date or compliance date set forth in any

    rulemaking issued by the Commission to implement provisions of the

    Dodd-Frank Act; (4) limit the Commission's authority under Dodd-Frank

    Act section 712(f) to issue rules, orders, or exemptions prior to the

    effective date of any provision of the Dodd-Frank Act and the CEA, in

    order to prepare for such effective date; and (5) affect the

    applicability of any provision of the CEA to futures contracts or

    options on futures contracts, or to cash markets.\17\

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    \17\ 76 FR at 42522.

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    III. Discussion of the Proposed Amendments to the July 14 Order

    On October 25, 2011, the Commission published in the Federal

    Register a Notice to amend the July 14 Order in two ways.\18\ First,

    the Commission proposed to amend the July 14 Order to extend the

    potential latest expiry dates. With respect to provisions covered in

    the first part of the relief in the July 14 Order, the Commission

    proposed that the temporary exemptive relief expire upon the earlier

    of: (1) The effective date of the applicable final rule further

    defining the relevant referenced term; or (2) July 16, 2012.\19\ This

    proposed amendment addressed the potential that, as of December 31,

    2011, the CFTC-SEC joint rulemakings ``further defining'' the

    referenced terms will not yet be effective. The Commission also

    proposed to amend the July 14 Order to extend the expiry date of the

    second part of the relief in the July 14 Order until the earlier of:

    (1) July 16, 2012; or (2) such other compliance date as may be

    determined by the Commission. For the same reason stated by the

    Commission in issuing the second part of the relief provided in the

    July 14 Order, the Commission proposed extending this exemptive relief

    to ``allow markets and market participants to continue to operate under

    the regulatory regime as in effect prior to July 16, 2011, but subject

    to various implementing regulations that the Commission promulgates and

    applies to the subject transactions, market participants, or markets.''

    \20\

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    \18\ Effective Date for Swap Regulation, 76 FR 65999, Oct. 25,

    2011.

    \19\ The date of July 16, 2012, is consistent with the potential

    transitional period provided in section 723(c) of the Dodd-Frank Act

    regarding former CEA section 2(h) and section 734(c) of the Dodd-

    Frank Act regarding former CEA section 5d (i.e., for ``not longer

    than a 1-year period'' following the general effective date of title

    VII).

    \20\ 76 FR at 42513.

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    Second, the Commission proposed to include within the second part

    of the relief any agreement, contract or transaction that fully meets

    the conditions in part 35 as in effect prior to December 31, 2011. This

    proposed amendment addressed the fact that such transactions, which

    were not included within the scope of the July 14 Order because the

    exemptive rules in part 35 covered them at that time, now require

    temporary relief because part 35 will no longer be available as of

    December 31, 2011.\21\ Accordingly, to ensure that the exemptive relief

    currently available for these transactions continues to be available

    after December 31, 2011, the Commission proposed to amend the July 14

    Order to incorporate by reference the part 35 relief available prior to

    December 31, 2011. Whereas the relief provided in part two of the July

    14 Order was (and would remain) limited to transactions in excluded or

    exempt

    [[Page 80236]]

    commodities, the proposed amendment also would include, beginning on

    January 1, 2012, transactions in agricultural commodities that fully

    meet the conditions in part 35 as in effect prior to December 31,

    2011.\22\ The Commission proposed that this further amendment to the

    July 14 Order is necessary to ensure that the same scope of the

    exemptive relief available before December 31, 2011 is available to all

    swaps and extends through July 16, 2012, at the latest.

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    \21\ The Commission recently promulgated a rule pursuant to

    section 723(c)(3) of the Dodd-Frank Act, and CEA sections 4(c) and

    4c(b), that, effective December 31, 2011, will repeal the existing

    part 35 relief and replace it with new Sec. 35.1 of the

    Commission's regulations. See Agricultural Swaps, 76 FR 49291, Aug.

    10, 2011. Rule 35.1 provides, in pertinent part, that ``agricultural

    swaps may be transacted subject to all provisions of the CEA, and

    any Commission rule, regulation or order thereunder, that is

    otherwise applicable to swaps. [It] also clarifies that by issuing a

    rule allowing agricultural swaps to transact subject to the laws and

    rules applicable to all other swaps, the Commission is allowing

    agricultural swaps to transact on [designated contract markets

    (``DCMs''), swap execution facilities (``SEFs'')], or otherwise to

    the same extent that all other swaps are allowed to trade on DCMs,

    SEFs, or otherwise.'' Id. at 49296.

    \22\ The Commission also clarified that, by operation of new

    Sec. 35.1 of the Commission's regulations, the Commission's

    statement in adopting the July 14 Order that a DCM may list and

    trade swaps ``under the DCM's rules related to futures contracts,

    without exemptive relief,'' 76 FR at 42518, would apply, as of

    December 31, 2011, to swaps in agricultural commodities.

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    In proposing these amendments, the Commission sought to ensure that

    current practices will not be unduly disrupted during the transition to

    the new regulatory regime. As stated above, the proposed July 16, 2012

    date coincides with the potential transitional period provided in

    sections 723(c) and 734(c) of the Dodd-Frank Act.\23\ Further, the

    Commission stated that, should the Commission deem it appropriate to

    terminate or extend any exemptive relief under part two of the July 14

    Order, it would be in a better position to comprehensively evaluate and

    consider any tailored exemption at that time.

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    \23\ See Order Regarding the Treatment of Petitions Seeking

    Grandfather Relief for Exempt Commercial Markets and Exempt Boards

    of Trade, 75 FR 56513, Sept. 16, 2010.

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    IV. Discussion of the Final Order

    The Commission received five comments in response to the Notice

    proposing to amend the July 14 Order.\24\ The comments generally

    focused upon three issues: (1) The general expiration date of the

    relief to be provided by the proposed amendment; (2) the application of

    the proposed amendment to agricultural swaps; and, (3) the expiry date

    applicable to exempt commercial markets (``ECMs'') operating pursuant

    to grandfather relief authorized by section 723(c)(l)-(2) of the Dodd-

    Frank Act and their market participants and clearing organizations. The

    comments and Commission determinations regarding each of these issues

    is discussed in the sections that follow. In addition, the final order

    includes other technical, non-substantive changes to the wording of the

    proposed amended order.

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    \24\ The Commission received comments from Better Markets, CME

    Group (CME); LCH.Clearnet Limited (LCH); Nodal Exchange LLC (Nodal

    Exchange or Nodal); and the Securities Industry and Financial Market

    Association (SIFMA). The comment file is available on the

    Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1102 (last visited Dec. 2, 2011).

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    A. Expiry Date of July 16, 2012

    1. Comments

    Commenters were divided on whether the Commission should include an

    expiry or ``sunset'' date of July 16, 2012. For example, Better Markets

    stated that continuing to set outside dates for the exemptive relief,

    rather than granting open-ended exemptive relief, establishes important

    deadlines so that work can be prioritized and completed as quickly as

    prudently possible.\25\ In contrast, CME Group and SIFMA recommended

    the Commission avoid setting a sunset provision date for the expiration

    of the temporary exemptive relief.\26\ SIFMA stated that the Commission

    should instead provide exemptive relief that lasts on a provision-by-

    provision basis until related substantive requirements of the Dodd-

    Frank Act are implemented, as the SEC provided for in its parallel

    relief under subtitle B of title VII.\27\ SIFMA said that avoiding the

    imposition of a sunset date would allow the Commission to adopt its

    final rules in a logical order that provides market participants with

    necessary legal certainty.\28\

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    \25\ Better Markets at 2.

    \26\ CME at 2; SIFMA at 2.

    \27\ SIFMA at 2.

    \28\ SIFMA at 2-3. Although beyond the scope of the Notice,

    SIFMA also reiterated its request that the Commission provide a

    comprehensive rulemaking schedule and implementation plan, as well

    as clear positions on the extraterritorial scope of Title VII and

    treatment of inter-affiliate transactions, as set forth in its

    November 4 Letter on the Commission's proposed compliance and

    implementation schedules for clearing, trade execution,

    documentation and margin. SIFMA at 3.

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    2. Commission Determination

    The Commission has determined to retain, as proposed, an outmost

    expiry date of July 16, 2012 for two reasons. First, the Commission

    continues to believe that it is appropriate and prudent to periodically

    review the extent and scope of any relief provided from the CEA, as

    amended by the Dodd-Frank Act.\29\ The Commission anticipates that

    additional rulemakings to implement the Dodd-Frank Act will be

    completed during the extended period of exemptive relief between

    December 31, 2011 and July 16, 2012. During this period the Commission

    also will be considering the appropriate phase-in of the various

    regulatory requirements under the Dodd-Frank rulemakings. Accordingly,

    the Commission believes it appropriate to periodically re-examine the

    scope and extent of the proposed exemptive relief in order to ensure

    that the scope of relief is appropriately tailored to the schedule of

    implementation of the Dodd-Frank Act requirements. Second, particularly

    with respect to part two of the July 14 Order, the limitation of this

    extension of exemptive relief to no later than July 16, 2012 is

    consistent with the transitional relief provided by the Congress in

    section 723(c) of the Dodd-Frank Act regarding former CEA section 2(h)

    and section 734(c) of the Dodd-Frank Act regarding former CEA section

    5d (i.e., for ``not longer than a 1-year period'' following the general

    effective date of title VII).\30\ As stated in the Notice, should the

    Commission deem it appropriate to terminate or extend any exemptive

    relief under part two of the July 14 Order, the Commission will be in a

    better position to comprehensively evaluate and consider any tailored

    exemption at that time.\31\

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    \29\ The Commission's position in this regard is unchanged from

    the first Effective Date for Swap Regulation proposal, 76 FR 35372,

    35374, June 17, 2011.

    \30\ See Orders Regarding the Treatment of Petitions Seeking

    Grandfather Relief for Exempt Commercial Markets and Exempt Boards

    of Trade, 75 FR 56513, Sept. 16, 2010.

    \31\ 76 FR at 66002.

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    B. Application to Agricultural Swaps

    1. Comments

    CME sought clarification on the application of the proposed

    amendment to agricultural swaps.\32\ CME stated that it was not clear

    from the Notice whether the proposed relief: (1) Would apply only to

    agricultural swaps that meet part 35 as in effect prior to December 31,

    2011; or (2) includes agricultural swaps that meet part 35 as in effect

    prior to December 31, 2011 notwithstanding that: (i) The transaction

    may be executed on a multilateral transaction execution facility; (ii)

    the transaction may be cleared; (iii) persons offering or entering into

    the transaction may be eligible contract participants as defined in the

    CEA prior to July 16; (iv) the transaction may be part of a fungible

    class of agreements that are standardized as to their material economic

    terms; and/or (v) no more than one of the parties to the transaction is

    entering into the transaction in conjunction with its line of business,

    but is neither an eligible contract participant nor an ESP), and the

    transaction was not and is not marketed to the public. CME believes the

    latter is consistent with new Commission regulation Sec. 35.1, and

    that the Commission should make this clear in

    [[Page 80237]]

    the text of any final order issued pursuant to the Notice.\33\

    ---------------------------------------------------------------------------

    \32\ CME at 2-3.

    \33\ Id.

    ---------------------------------------------------------------------------

    CME further stated that pursuant to the Notice and new regulation

    Sec. 35.1, starting on January 1, 2012, swaps based on agricultural

    commodities, like swaps based on exempt and excluded commodities, may

    trade on either a DCM, ECM or exempt board of trade (``EBOT'') (until

    such time as status as a swap execution facility (``SEF'') is

    available). CME believes the Commission should make this clear in the

    text of any final order issued pursuant to the Notice.\34\

    ---------------------------------------------------------------------------

    \34\ CME at 3.

    ---------------------------------------------------------------------------

    2. Commission Determination

    Prior to the Dodd-Frank Act, the CEA did not permit transactions in

    agricultural commodities on ECMs or EBOTs.\35\ Nothing in the Notice or

    the Commission's recently promulgated Sec. 35.1\36\ provide that

    agricultural swaps may trade on an ECM or EBOT. Rather, regulation

    Sec. 35.1 allows agricultural swaps to transact subject to the laws

    and rules applicable to all other swaps, and to transact on DCMs, SEFs,

    ``or otherwise'' to the same extent that all other swaps are allowed to

    trade on DCMs, SEFs, ``or otherwise.'' \37\ To interpret the phrase

    ``or otherwise'', in conjunction with the exemptive relief issued

    herein, as expanding the permissible role for ECMs and EBOTs to

    agricultural commodities would be: (1) Contrary to the plain language

    of the pre-Dodd-Frank exemptions for ECMs and EBOTs; and (2)

    inconsistent with the intent underlying the July 14 Order to preserve

    the status quo during implementation of the new swap regulatory

    regime.\38\ Accordingly, the Commission now clarifies that new part 35

    \39\ and the exemptive relief issued herein, and any interaction of the

    two, do not operate to expand the pre-Dodd-Frank scope of transactions

    eligible to be transacted on either an ECM or EBOT to include

    transactions in agricultural commodities.

    ---------------------------------------------------------------------------

    \35\ Specifically, the statutory provisions authorizing ECMs

    (pre Dodd-Frank CEA section 2(h)) applied to transactions in exempt

    commodities, and the statutory provisions authorizing EBOTs (pre

    Dodd-Frank CEA section 5d) applied to transactions in excluded

    commodities. Agricultural commodities are neither exempt nor

    excluded commodities.

    \36\ See Agricultural Swaps, 76 FR 49291, Aug. 10, 2011.

    \37\ Id. at 49296.

    \38\ The Notice stated: ``[T]he proposed extension of this

    exemptive relief `will allow markets and market participants to

    continue to operate under the regulatory regime as in effect prior

    to July 16, 2011 * * * ' '' 76 FR 65999, at 66001. The regulatory

    regime as in effect prior to July 16, 2011, did not permit

    transactions in agricultural commodities on ECMs or EBOTs.

    \39\ See footnote 36, above.

    ---------------------------------------------------------------------------

    To clarify this point, and as compared to the proposed amended

    order, the Commission has reformatted this final order by moving the

    text addressing transactions that meet part 35 as in effect prior to

    December 31, 2011, to a paragraph separate from the text addressing

    transactions that meet part 35 as in effect prior to December 31, 2011

    notwithstanding that: (i) The transaction may be executed on a

    multilateral transaction execution facility; (ii) the transaction may

    be cleared; (iii) persons offering or entering into the transaction may

    be eligible contract participants as defined in the CEA prior to July

    16; (iv) the transaction may be part of a fungible class of agreements

    that are standardized as to their material economic terms; and/or (v)

    no more than one of the parties to the transaction is entering into the

    transaction in conjunction with its line of business, but is neither an

    eligible contract participant nor an ESP, and the transaction was not

    and is not marketed to the public.

    C. Expiry Date Applicable to ECMs and EBOTs Operating Pursuant to

    Grandfather Relief Authorized by Section 723(c)(1)-(2) of the Dodd-

    Frank Act and Their Market Participants and Clearing Organizations

    1. Comments

    Two commenters, Nodal Exchange and LCH, expressed concern with the

    expiry date of the second part of the relief contained in the proposed

    amended order \40\ as it applies to ECMs that have petitioned for the

    grandfather relief authorized by section 723(c)(1)-(2) of the Dodd-

    Frank Act \41\ and/or to such ECMs' market participants or clearing

    organizations. As set forth above, the Commission proposed to amend the

    July 14 Order to extend the expiry date of the second part of the

    relief until the earlier of: (1) July 16, 2012; or (2) such other

    compliance date as may be determined by the Commission.

    ---------------------------------------------------------------------------

    \40\ As noted above, part two of the July 14 Order provides

    temporary exemptive relief from the provisions of the CEA that

    apply, or may apply, to certain agreements, contracts, and

    transactions in exempt or excluded commodities as a result of the

    repeal of the exemptions and exclusions contained in former CEA

    sections 2(d), 2(e), 2(g), 2(h), and 5d as of July 16, 2011. See

    sections 723(a)(1) and 734(a) of the Dodd-Frank Act.

    \41\ Section 723(c) of the Dodd-Frank Act permitted persons to

    submit to the Commission, within 60 days of the enactment of the

    Dodd-Frank Act, a petition to remain subject to former section 2(h)

    of the CEA and authorized the Commission to allow such persons to

    continue to operate subject to former section 2(h) of the CEA for

    not longer than a one year period.

    ---------------------------------------------------------------------------

    Nodal Exchange is an ECM that has filed for grandfather relief

    under the ECM ``Grandfather Order'' issued by the Commission pursuant

    to the authority provided by section 723(c)(1)-(2) of the Dodd-Frank

    Act.\42\ The ECM Grandfather Order permits ECMs that satisfy specified

    conditions to continue to operate pursuant to the provisions of former

    CEA section 2(h)(3)-(7) until July 15, 2012. Among the applicable

    conditions are the requirements that the ECM must have filed a formal

    SEF or DCM application with the Commission within sixty days after the

    effective date of final regulations implementing the provisions of

    either section 733 or section 735 of the Dodd-Frank Act,\43\ whichever

    is applicable, and that the ECM's SEF or DCM application be pending

    before the Commission.

    ---------------------------------------------------------------------------

    \42\ See Orders Regarding the Treatment of Petitions Seeking

    Grandfather Relief for Exempt Commercial Markets and Exempt Boards

    of Trade, 75 FR 56513, Sept. 16, 2010.

    \43\ Sections 733 and 735 of the Dodd-Frank Act include Core

    Principles and other statutory requirements applicable to SEFs and

    DCMs, respectively.

    ---------------------------------------------------------------------------

    Nodal Exchange requested that the proposed amended order be

    modified in two ways. First, Nodal requested that ``the Commission

    provide relief to ECMs compliant with the grandfathering provisions by

    extending the second part of the July 14 Order for these compliant ECMs

    until the latter of (1) July 16, 2012; or (2) such other compliance

    date as may be determined by the Commission.'' \44\ In support of its

    request, Nodal stated that ``[s]ince the Dodd-Frank Act eliminates ECMs

    by no later than July 16, 2012, it would appear that Nodal Exchange

    must become a registered DCM or SEF by July 16, 2012.'' \45\ Nodal

    asserted, however, that it ``appears highly unlikely that Nodal

    Exchange will be able to be either a registered DCM or SEF by July 16,

    2012 because the rules for neither DCMs nor SEFs have been finalized''

    and because ``based on the proposed rules for DCMs, the 180-day

    statutory review period will probably govern the application review

    process.'' \46\

    ---------------------------------------------------------------------------

    \44\ Nodal at 2 (emphasis in the original).

    \45\ Id. at 1.

    \46\ Id. at 2.

    ---------------------------------------------------------------------------

    Nodal claimed that its ``markets will be disrupted if Nodal

    Exchange cannot be registered as a DCM or SEF by July 16, 2012, unless

    Nodal Exchange can be permitted to continue to operate as an ECM until

    the Commission grants appropriate registration.'' \47\ Nodal also

    claimed that ``[w]ithout further guidance from the Commission

    consistent with the ECM transition

    [[Page 80238]]

    period of section 723(c) of the Dodd-Frank Act,'' the proposed amended

    order ``creates unnecessary uncertainty for Nodal Exchange, its

    participants, its clearing house LCH.Clearnet,\48\ and the LCH.Clearnet

    clearing members for Nodal Exchange participants.'' \49\

    ---------------------------------------------------------------------------

    \47\ Id.

    \48\ Nodal represents that all of its contracts are cleared by

    LCH.Clearnet. Id. at 1, fn. 1.

    \49\ Id. at 2.

    ---------------------------------------------------------------------------

    Second, Nodal asserted that with respect to non-ECM entities such

    as Nodal Exchange participants and their LCH clearing members,

    extending the relief in the July 14 Order until the earlier of: (1)

    July 16, 2012; or (2) such other compliance date as may be determined

    by the Commission ``creates uncertainty in the timeline for compliance

    with the new regulatory regime,'' noting that it is ``unclear what

    circumstances could cause `such other compliance date' to be determined

    by the Commission.'' \50\ Accordingly, Nodal Exchange requested that

    the Commission provide exemptive relief to ``non-ECM market

    participants'' by extending the second part of the July 14 Order until

    July 16, 2012 without qualification.\51\

    ---------------------------------------------------------------------------

    \50\ Id.

    \51\ Id.

    ---------------------------------------------------------------------------

    In a related comment, LCH similarly requested that the Commission

    extend the exemptive relief in the second part of the July 14 Order to

    July 16, 2012 ``without any qualification.'' \52\ LCH.Clearnet Limited,

    one of the LCH's operating companies, is registered with the Commission

    as a derivatives clearing organization (``DCO'') and provides clearing

    services for Nodal Exchange. According to LCH, the second part of the

    Commission's July 14 Order permits LCH.Clearnet Limited to continue to

    clear transactions for Nodal Exchange.\53\ LCH acknowledged that

    LCH.Clearnet's ``DCO designation must be amended before Nodal

    Exchange's change in registration [to a DCM or SEF] occurs.'' \54\

    ---------------------------------------------------------------------------

    \52\ LCH at 1.

    \53\ Id. at 2.

    \54\ Id.

    ---------------------------------------------------------------------------

    LCH commented that the Commission ``created unnecessary uncertainty

    for LCH.Clearnet Limited, Nodal, and LCH.Clearnet clearing members for

    firms trading on Nodal by proposing that the extension of the July 14

    Order would expire `upon the earlier of: (I) July 16, 2012; or (II)

    such other compliance date as may be determined by the Commission.' ''

    \55\ Stating that ``no explanation for the `other compliance date'

    language'' was provided, LCH maintained that the addition of this

    language ``raises the spectre that the Commission could rescind the

    exemptive relief at any time for any reason or without allowing

    sufficient time for LCH.Clearnet Limited to apply for and receive an

    amended order of registration.'' \56\ LCH stated that extending the

    expiration date of the second part of the July 14 Order to July 16,

    2012 without qualification would be ``consistent with the transitional

    period for ECMs provided in section 723(c) of Dodd-Frank'' and the

    Commission's goal of striving ``to ensure that current practices will

    not be unduly disrupted during the transition to the new regulatory

    regime.'' \57\

    ---------------------------------------------------------------------------

    \55\ Id. (emphasis in the original).

    \56\ Id.

    \57\ Id.

    ---------------------------------------------------------------------------

    2. Commission Determination

    Although these comments came from an ECM and its clearing

    organization, the points raised in these comments also are applicable

    to EBOTs that are operating under essentially the same Grandfather

    Order requirements as ECMs.\58\ Accordingly, in modifying the proposed

    amended order to address the comments received regarding ECMs, the

    Commission also has determined to modify the proposed amended order to

    address EBOTs.

    ---------------------------------------------------------------------------

    \58\ See Orders Regarding the Treatment of Petitions Seeking

    Grandfather Relief for Exempt Commercial Markets and Exempt Boards

    of Trade, 75 FR 56513, Sept. 16, 2010.

    ---------------------------------------------------------------------------

    While the final order continues to provide that the exemption set

    forth in the second part of the order generally shall expire upon the

    earlier of July 16, 2012 or such other compliance date as may be

    determined by the Commission, it has been modified to provide that the

    exemption will not expire prior to July 16, 2012 in certain

    circumstances. Specifically, no other compliance date will be

    determined (and thus, the exemption will remain in effect until July

    16, 2012) for agreements, contracts, and transactions (and for persons

    offering, entering into, or rendering advice or rendering other

    services with respect to, such agreements, contracts or transactions)

    that: (1) Are executed on an ECM or EBOT that is operating under the

    terms of the Commission's ECM/EBOT Grandfather Order and that complies

    with all of the applicable conditions of the ECM/EBOT Grandfather

    Order; and (2) are cleared by a Commission-registered DCO. This

    modification is narrow. It applies only to agreements, contracts, and

    transactions that are executed on a grandfathered ECM or EBOT and are

    cleared by a registered DCO, and it is restricted in scope to those

    specific requirements or provisions of the CEA (and relevant

    implementing regulations) that otherwise would apply to such

    agreements, contracts, and transactions and that are inconsistent with

    the ECM or EBOT Grandfather Order.\59\

    ---------------------------------------------------------------------------

    \59\ This modification does not affect the applicability of

    general provisions applicable to DCOs or clearing requirements that

    the Commission may promulgate under the Dodd-Frank Act that may

    become effective before July 16, 2012. Such requirements would still

    apply to the DCO and transactions that are not executed on an ECM or

    EBOT.

    ---------------------------------------------------------------------------

    As noted by the commenters, the Commission, in proposing the

    amendments to the July 14 Order, sought to ensure that current

    practices will not be unduly disrupted during the transition to the new

    regulatory regime.\60\ The Commission also stated that it believes it

    is in the interest of the public and market participants to continue to

    provide regulatory certainty regarding the applicability of title VII

    of the Dodd-Frank Act.\61\ The modification contained in the final

    order will further these objectives by providing greater consistency

    between the expiration of this exemptive relief and the terms of the

    ECM/EBOT Grandfather Order authorized by Congress in sections 723(c)

    and 734(c) of the Dodd-Frank Act. It also will reduce the likelihood of

    legal uncertainty that could arise were the exemptive relief applicable

    to grandfathered ECMs and EBOTs that execute particular transactions

    and the DCOs that clear those same transactions subject to disparate

    expiration dates. In this way, ECMs and EBOTs that are compliant with

    the conditions contained in the ECM/EBOT Grandfather Order, their

    market participants, and their DCOs and clearing members, are more

    likely to operate without disruption through the end of the grandfather

    relief period authorized by the Dodd-Frank Act--July 16, 2012.

    ---------------------------------------------------------------------------

    \60\ See, e.g., 76 FR at 66002.

    \61\ Id.

    ---------------------------------------------------------------------------

    The Commission, though, has determined not to modify the expiration

    date of the second part of the proposed amended order to permit the

    relief to expire later than July 16, 2012 for the same reasons that it

    has decided to retain a ``sunset'' or expiration provision generally.

    First, the Commission continues to believe that it is appropriate and

    prudent to periodically review the extent and scope of any exemptive

    relief provided from the CEA, as amended by the Dodd-Frank Act. Second,

    the limitation of this exemptive relief to no later than July 16, 2012

    is consistent with the transitional relief provided by Congress (i.e.,

    for ``not longer than a 1-year period''). Finally, should the

    Commission deem it

    [[Page 80239]]

    appropriate to terminate or extend any exemptive relief under part two

    of the July 14 Order, the Commission will be in a better position to

    comprehensively evaluate and consider any tailored exemption at that

    time.\62\

    ---------------------------------------------------------------------------

    \62\ See 76 FR at 66002.

    ---------------------------------------------------------------------------

    V. Related Matters

    A. Paperwork Reduction Act

    The Paperwork Reduction Act (``PRA'') \63\ imposes certain

    requirements on Federal agencies (including the Commission) in

    connection with conducting or sponsoring any collection of information

    as defined by the PRA. These amendments to the July 14 Order will not

    require a new collection of information from any persons or entities

    that will be subject to the final order.

    ---------------------------------------------------------------------------

    \63\ 44 U.S.C. 3507(d).

    ---------------------------------------------------------------------------

    B. Cost-Benefit Considerations

    Section 15(a) of the CEA \64\ requires the Commission to consider

    the costs and benefits of its action before issuing an order under the

    CEA. CEA section 15(a) further specifies that costs and benefits shall

    be evaluated in light of five broad areas of market and public concern:

    (1) Protection of market participants and the public; (2) efficiency,

    competitiveness, and financial integrity of futures markets; (3) price

    discovery; (4) sound risk management practices; and (5) other public

    interest considerations. The Commission may in its discretion give

    greater weight to any one of the five enumerated areas and could in its

    discretion determine that, notwithstanding its costs, a particular

    order is necessary or appropriate to protect the public interest or to

    effectuate any of the provisions or to accomplish any of the purposes

    of the CEA.

    ---------------------------------------------------------------------------

    \64\ 7 U.S.C. 19(a).

    ---------------------------------------------------------------------------

    The Commission requested but received no comments on the

    consideration of costs and benefits of the proposed amendments

    discussed in the Notice. In the Notice, the Commission stated that the

    proposed amendments to the existing July 14 Order would not change the

    nature or limit the scope of relief granted.\65\ The Commission

    continues to believe that these amendments do not change the nature or

    scope of the relief granted and, as such, impose no costs beyond the

    costs imposed by the July 14 Order. Rather, this final order confers an

    added benefit to market participants and the public by extending the

    relief provided for in the July 14 Order through no later than July 16,

    2012. Accordingly, the consideration of costs and benefits set forth in

    the July 14 Order may be incorporated by reference in this final order.

    ---------------------------------------------------------------------------

    \65\ See 76 FR 42521.

    ---------------------------------------------------------------------------

    VI. Amendments to the July 14 Order

    The Commission amends the July 14 Order to read as follows:

    The Commission, to provide for the orderly implementation of the

    requirements of Title VII of the Dodd-Frank Act, pursuant to sections

    4(c) and 4c(b) of the CEA and section 712(f) of the Dodd-Frank Act,

    hereby issues this Order consistent with the determinations set forth

    above, which are incorporated in this final order, as amended, by

    reference, and:

    (1) Exempts, subject to the conditions set forth in paragraph (4),

    all agreements, contracts, and transactions, and any person or entity

    offering, entering into, or rendering advice or rendering other

    services with respect to, any such agreement, contract, or transaction,

    from the provisions of the CEA, as added or amended by the Dodd-Frank

    Act, that reference one or more of the terms regarding entities or

    instruments subject to further definition under sections 712(d) and

    721(c) of the Dodd-Frank Act, which provisions are listed in Category 2

    of the Appendix to this Order; provided, however, that the foregoing

    exemption:

    a. Applies only with respect to those requirements or portions of

    such provisions that specifically relate to such referenced terms; and

    b. With respect to any such provision of the CEA, shall expire upon

    the earlier of: (i) the effective date of the applicable final rule

    further defining the relevant term referenced in the provision; or (ii)

    July 16, 2012.

    (2) Exempts, subject to the conditions set forth in paragraph (4),

    all agreements, contracts, and transactions, and any person or entity

    offering, entering into, or rendering advice or rendering other

    services with respect to, any such agreement, contract, or transaction,

    from the provisions of the CEA, if the agreement, contract, or

    transaction complies with part 35 of the Commission's regulations as in

    effect prior to December 31, 2011. This exemption shall expire upon the

    earlier of (i) July 16, 2012; or (ii) such other compliance date as may

    be determined by the Commission.

    (3) Exempts, subject to the conditions set forth in paragraph (4),

    all agreements, contracts, and transactions, and any person or entity

    offering, entering into, or rendering advice or rendering other

    services with respect to, any such agreement, contract, or transaction,

    from the provisions of the CEA, if the agreement, contract, or

    transaction complies with part 35 of the Commission's regulations as in

    effect prior to December 31, 2011, including any agreement, contract,

    or transaction in an exempt or excluded (but not agricultural)

    commodity that complies with such provisions then in effect

    notwithstanding that:

    a. The agreement, contract, or transaction may be executed on a

    multilateral transaction execution facility;

    b. The agreement, contract, or transaction may be cleared;

    c. Persons offering or entering into the agreement, contract or

    transaction may not be eligible swap participants, provided that all

    parties are eligible contract participants as defined in the CEA prior

    to the date of enactment of the Dodd-Frank Act;

    d. The agreement, contract, or transaction may be part of a

    fungible class of agreements that are standardized as to their material

    economic terms; and/or

    e. No more than one of the parties to the agreement, contract, or

    transaction is entering into the agreement, contract, or transaction in

    conjunction with its line of business, but is neither an eligible

    contract participant nor an eligible swap participant, and the

    agreement, contract, or transaction was not and is not marketed to the

    public;

    Provided, however, that:

    a. Such agreements, contracts, and transactions in exempt or

    excluded commodities (and persons offering, entering into, or rendering

    advice or rendering other services with respect to, any such agreement,

    contract, or transaction) fall within the scope of any of the CEA

    sections 2(d), 2(e), 2(g), 2(h), and 5d provisions or the line of

    business provision as in effect prior to July 16, 2011; and

    b. This exemption shall expire upon the earlier of: (i) July 16,

    2012; or (ii) such other compliance date as may be determined by the

    Commission, except that the exemption shall not expire prior to July

    16, 2012 with limited respect to the specific requirements or

    provisions of the CEA and regulations promulgated thereunder that

    otherwise would apply to such agreements, contracts, and transactions

    (and the persons offering, entering into, or rendering advice or

    rendering other services with respect to them) and that are

    inconsistent with the exempt commercial market (``ECM'')/exempt board

    of trade (``EBOT'') Grandfather Order if (I) such agreements,

    contracts, and transactions are executed on an ECM or an EBOT that is

    operating under the terms of, and

    [[Page 80240]]

    compliant with the applicable conditions of, the Commission's ECM/EBOT

    Grandfather Order which became effective September 20, 2010; (II) such

    agreements, contracts, and transactions are cleared by a registered

    derivatives clearing organization; and (III) such ECM or EBOT complies

    with all other Commission regulations implementing the provisions of

    the Dodd-Frank Act that are listed in Category 1 of the Appendix to

    this Order.

    (4) Provides that the foregoing exemptions in paragraphs (1), (2)

    and (3) above shall not:

    a. Limit in any way the Commission's authority with respect to any

    person, entity, or transaction pursuant to CEA sections 2(a)(1)(B), 4b,

    4o, 6(c), 6(d), 6c, 8(a), 9(a)(2), or 13, or the regulations of the

    Commission promulgated pursuant to such authorities, including

    regulations pursuant to CEA section 4c(b) proscribing fraud;

    b. Apply to any provision of the Dodd-Frank Act or the CEA that

    became effective prior to July 16, 2011;

    c. Affect any effective or compliance date set forth in any

    rulemaking issued by the Commission to implement provisions of the

    Dodd-Frank Act;

    d. Limit in any way the Commission's authority under section 712(f)

    of the Dodd-Frank Act to issue rules, orders, or exemptions prior to

    the effective date of any provision of the Dodd-Frank Act and the CEA,

    in order to prepare for the effective date of such provision, provided

    that such rule, order, or exemption shall not become effective prior to

    the effective date of the provision; and

    e. Affect the applicability of any provision of the CEA to futures

    contracts or options on futures contracts, or to cash markets.

    In its discretion, the Commission may condition, suspend,

    terminate, or otherwise modify this Order, as appropriate, on its own

    motion. This final order, as amended, shall be effective immediately.

    Issued in Washington, DC, on December 19, 2011 by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

    Note: The following appendix will not appear in the Code of

    Federal Regulations.

    Statement of Commissioner Scott D. O'Malia

    For the fourth time this year,\66\ I am concurring with the

    Commission's decision to provide market participants with temporary

    relief from certain provisions of the Dodd-Frank Act.\67\ Again, I am

    concurring despite my belief that this iteration of the final exemptive

    order (the ``Second Iteration'') is deeply flawed--just like the July

    14, 2011 final order (the ``First Iteration''). By now, it is well

    known that I object to arbitrary sunsets. It is also well known that I

    object to the Commission's recalcitrance--despite Congressional

    direction--to set forth comprehensive rulemaking and implementation

    schedules.\68\ I will not expound upon such objections here. Instead, I

    would like to focus on the Commission's dogmatic adherence to the

    exemptive approach taken by the First Iteration, even in light of known

    facts. Such adherence sets a troubling precedent for our Dodd-Frank

    outstanding proposals.

    ---------------------------------------------------------------------------

    \66\ See ``Do What You Can'', Opening Statement for the June 14,

    2011 Commission Meeting, available at: http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement061411; Concurring

    Statement on the Order Regarding the Effective Date for Swap

    Regulation, dated July 14, 2011, available at: http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071411; Concurring

    Statement, Second Extension of Temporary Exemptive Relief, dated

    October 18, 2011, available at: http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement101811c.

    \67\ To provide such relief, the Commission is relying on its

    exemptive authority under section 4(c) of the Commodity Exchange Act

    and its authority under section 712(f) of the Dodd-Frank Act.

    \68\ See H.R. Rep. No. 112-101, at 54 (2011), available at

    http://www.gpo.gov/fdsys/pkg/CRPT-112hrpt101/pdf/CRPT-112hrpt101.pdf.

    ---------------------------------------------------------------------------

    The Goal

    The First Iteration provided for the termination of exemptive

    relief on December 31, 2011, absent further Commission action (the

    ``December Sunset''). The primary reason that the Commission advanced

    for the December Sunset was that ``it would be appropriate to

    periodically re-examine the scope and extent of the proposed exemptive

    relief in order to ensure that the scope of relief is appropriately

    tailored to the schedule of implementation of the Dodd-Frank Act

    requirements.'' \69\

    ---------------------------------------------------------------------------

    \69\ The proposed order for Effective Date for Swap Regulation,

    76 FR 35372, 35375 (Jun. 17, 2011). See the final order for

    Effective Date for Swap Regulation, 76 FR 42508, 42514 (Jul. 19,

    2011) (stating that ``[t]he Commission has determined, for the

    reasons discussed in the proposed order, not to alter the expiration

    date(s) contained in the proposed order.'').

    In both the First and Second Iterations, the Commission advanced

    another reason for a sunset. Essentially, the Commission argued

    that, with respect to the Category 3 provisions, ``limiting

    exemptive relief to a fixed period is consistent with the approach

    to transitional relief provided in sections 723(c) and 734 of the

    Dodd-Frank Act.'' 76 FR at 42514. See Section IV(A)(2) of the Second

    Iteration. With respect to the First Iteration, this statement was

    somewhat odd, since the December Sunset was earlier--by six months--

    than the end date for transitional relief specified by those two

    Dodd-Frank sections. With respect to the Second Iteration, this

    statement is accurate. However, the transitional relief specified by

    those two Dodd-Frank sections may have been predicated on the

    Commission completing its Dodd-Frank rulemakings by the general

    effective date of July 16, 2011. If the Commission assumes

    otherwise, then it would be imputing to Congress the intent to place

    market participants in a Catch-22. Specifically, the Commission

    would be stating that Congress intended to withdraw transitional

    relief from market participants before the Commission completes the

    Dodd-Frank structures to which market participants are explicitly

    supposed to transition. This imputation may be somewhat ungenerous.

    I believe that sections 723(c) and 734(c) of the Dodd-Frank Act,

    when interpreted in the proper context, do not support a sunset in

    the Second Iteration.

    ---------------------------------------------------------------------------

    The Facts

    Let us now examine the facts. After all, hindsight should be 20/20.

    First, the December Sunset has done nothing to ensure that the

    Commission completes its Dodd-Frank rulemakings more expeditiously.

    Specifically, the Commission has not completed the definitional

    rulemakings that Category 2 provisions (as the First and Second

    Iterations define such term) require to become effective. Additionally,

    the Commission has not completed the rulemakings on designated contract

    markets and swap execution facilities that would enable Category 3

    provisions (as the First and Second Iterations define such term) to

    become effective without disrupting existing markets.

    Second, the December Sunset has not permitted the Commission to

    tailor the scope and extent of the current exemption. This is

    unsurprising. Market participants cannot reasonably comply with

    Category 2 or 3 provisions unless the Commission completes predicate

    rulemakings. An arbitrary sunset cannot change this fact. Hence, the

    Second Iteration emphasizes that ``the proposed amendments to the

    existing July 14 Order would not change the nature or limit the scope

    of relief granted.'' \70\

    ---------------------------------------------------------------------------

    \70\ Section V(B) of the Second Iteration.

    ---------------------------------------------------------------------------

    Commission Response

    As demonstrated above, the December Sunset achieved none of its

    goals. However, in formulating the Second Iteration, the Commission

    appears to have ignored inconvenient truths. The Second Iteration

    extends the December Sunset to July 16, 2012. Simultaneously, the

    Commission continues its refusal to provide market participants with

    its plan for the completion of Dodd-Frank rulemakings by July 16, 2012.

    In fact, at least one market participant has already indicated that--

    based on reasonable estimates of Commission progress--it would need

    exemptive relief beyond the

    [[Page 80241]]

    new sunset.\71\ I am already anticipating fifth and sixth votes on

    exemptive relief.

    ---------------------------------------------------------------------------

    \71\ See comment letter from Nodal Exchange, LLC, dated November

    23, 2011, to the proposed order on Effective Date for Swap

    Regulation, 76 FR 65999 (Oct. 25, 2011), available at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1102 (stating

    ``[i]t appears highly unlikely that Nodal Exchange will be able to

    be either a registered DCM or SEF by July 16, 2012 because the rules

    for neither DCMs nor SEFs have been finalized. Furthermore, based on

    the proposed rules for DCMs, the 180-day statutory review period

    will probably govern the application review process. Without further

    guidance from the Commission * * * the CFTC Proposed Release created

    unnecessary uncertainty for Nodal Exchange, its participants, its

    clearing house LCH.Clearnet, and the LCH.Clearnet clearing members

    for Nodal Exchange participants.'').

    ---------------------------------------------------------------------------

    Let's Figure Out the Best Way to Reach the Goal

    I support the Second Iteration because some certainty is better

    than no certainty. However, if the Commission is truly open to

    reconsidering its Dodd-Frank proposals--as some have indicated--the

    Second Iteration should have contained no arbitrary sunset. In the

    Second Iteration, the Commission displays a troubling willingness to

    adhere to prior convention.\72\ By the fifth and sixth times I have to

    vote on temporary relief, I hope that the Commission will have agreed

    to grant market participants much-deserved certainty until applicable

    rulemakings become effective. Additionally, I hope that the Commission

    will have provided rulemaking and implementation schedules to market

    participants, so that they can plan to be in compliance when such

    rulemakings become effective. As Martin Luther King, Jr. has said: ``We

    must accept finite disappointment, but never lose infinite hope.''

    ---------------------------------------------------------------------------

    \72\ According to the Office of Management and Budget, we have

    promulgated five final rulemakings that would each result in an

    annual effect on the American economy of more than $100 million a

    year. If the Commission continues to adhere to its Dodd-Frank

    approach, without consideration of new and applicable facts, then

    the Commission may impose substantial and unnecessary costs on the

    American economy--costs that we all can ill-afford.

    [FR Doc. 2011-32841 Filed 12-22-11; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: December 23, 2011



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